US yield curve to flatten

The US yield curve should flatten over the coming months as both the 2- and 5-year US Treasury yield continue higher compared to the 10- and 30-year, according to Ari Wald, Technical Analyst at Oppenheimer.

Wald points out that although the 2- and 5-year yields are correcting sideways following an important multi-year breakout in trend, he thinks there is more upside in them (see Chart). Ultimately, however, he thinks rates will head higher in all durations, albeit the 10s and 30s are battling a downtrend and face more resistance, whereas the 2s and 5s are not.

Wald says such a flattening of the curve is consistent with a Fed tightening cycle when bull markets typically shift from a liquidity-driven advance to an earnings-driven one. He suggests there is no need to worry about recession just yet; reminding us that it is an inverted yield curve that has been a reliable recessionary indicator over the last 40 years, not a flattening one.